The Point This Rally Must Reach&hellip;or Else

The pattern of lower highs and lower lows is unfolding on the charts, says MoneyShow’s Jim Jubak, and unless the S&P can break through the August highs soon, the market is likely to get punished further.

For the week ahead, watch the technical numbers.

Now you may or may not be a technical analyst. You may think, "Oh, this chart stuff is mumbo-jumbo, but the fact is that there are a lot of people out there who pay attention to it, the market doesn’t even move in response to these support and resistance levels…"

Even if it’s only a self-fulfilling prophecy—and I think there’s more to it here. I think a good element of this is a measure of market psychology—but even if it’s only a self-fulfilling prophecy, you ought to pay attention or at least know where things are going.

Here’s the problem that we’re facing. If you look at the charts, what it looks like right now is the possibility that we’re setting up a really, really nasty pattern. This would be a pattern that would suggest that the punishment that we have taken in August and September isn’t over yet, that the bear market is really sort of settling in, and that we’ve got more pain coming.

The problem is that there is a pattern in technical analysis that’s called declining highs, if you will. You see a high of 1,300 and the next time the market rallies it only rallies to 1,250, and the next time the market rallies it only rallies to 1,200, and you get a sense of even with the fluctuations, we’re locked into a downward trend.

You can see that pattern starting to develop, but we’re not yet locked into that. If we would break through and get a rally that took us to a higher high, this wouldn’t happen. Right now, we’ve got a pattern that says:

The July high was around 1,344

The high in August was about 1,220

The high in September—in the rally that really sort of occupied the week of September 23, 2011, or whatever—that rally, if it has failed, failed at 1,175

It’s really important we get a few more days that take us through 1,220, or at least back to 1,220, so we don’t have this pattern that people are going to look at and go "Oh, ok, this is a declining market, I don’t want to put any money in."

As I say, sometimes this is just a self-fulfilling prophecy. But certainly that kind of pattern would be really worrying if you’re looking at this market and going, "When does this pain stop?"

So watch 1,220, watch to see if we will go above it, or whether indeed we’re going to be set into a pattern of consistently lower highs.